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London Fights to Defend Office Space

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The idea of converting offices into residential property as a way of encouraging house-building is not a new one; David Cameron first flighted the policy two years ago.

But at the time the Conservative's election-defining policy of devolving more planning powers to local authorities was fashionable, and the idea was shelved.

The revelation that the government could this week push through changes to the planning system to allow nationwide conversions of offices to housing underlines how far down the political agenda "localism" has tumbled.

The rule change is intended to encourage building projects in and around U.K. cities as developers try to cash in on the widening gap between office prices and .

The value of office developments fell sharply at the start of the financial crisis. Although London has bounced back, regional office buildings and older properties nearing obsolescence have been the worst affected. In the downturn, a combination of over-supply, changing corporate requirements for office space and shrinking workforces has left many lying empty.

According to data from Jones Lang LaSalle, the property consultancy, office vacancy rates in Manchester, Leeds and Bristol are all at about 10 percent of total stock. In Birmingham the figure is 17 per cent, while in the Thames Valley it has risen to 21.2 per cent.

"There is already a massive disparity between demand for office space and housing, so you are likely to see a lot of people take advantage," says Daniel Levy, a real estate lawyer at Mishcon de Reya

Mr Levy adds that the policy would give potential purchasers of low-value office buildings clarity over what the property could be used for – "it could have a massive effect on values".

However, property industry experts warn that much of the redevelopment of offices will focus on the one part of the country that needs it the least: London.

The capital has become increasingly dislocated from the rest of the U.K. housing market in terms of both price and the supply of new developments, fueled by incessant interest from international buyers. The pipeline of upmarket housing projects in planning or already under construction in the U.K. capital increased more than two-thirds during 2012, with 15,500 units slated for delivery by 2021, according to EC Harris, the property consultancy.

Nick Candy, the luxury property developer behind One Hyde Park, the world's most expensive apartment block, says there is "a real risk for central London that there could be an over-supply of residential property and a shortage of well located office space."

"In a way that is good: it creates opportunities in the market when there is suddenly not enough offices to go round. But it is much harder to convert housing back to offices as you need to control all of the individual apartments, so you could get a real squeeze on supply," he adds.

Liam Bailey, head of residential research at Knight Frank, says that many office buildings that would be desirable for conversion in London, such as those along the Thames waterfront, have already been turned into housing. Others, such as Ludgate House await planning approval to be demolished to make way for housing.

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"Most of central London has been picked over in detail by developers and a lot of the office buildings left have deep floorplates and a lack of outlook, which, without expensive modifications, just don't suit residential," he adds

The City of London, which has always been fiercely resistant to residential development, has secured an exemption from the rule. Other authorities, such as northern cities, will be allowed to make the case for an exemption from the blanket new rule which could accelerate the trend of the last two decades towards "city living".

Conurbations such as Leeds, Manchester and Bristol have seen a noticeable conversion of old lofts and warehouses into residential flats, often alongside cleaned-up urban canals. But that in turn has caused concerns about the erosion of "business districts" in those cities.

In spite of the opportunities for developers, any change in policy will also affect the profits they make from so-called planning gains.

The complexity and cumbersomeness of the existing system means developers can add millions of pounds of value to a building or site, simply by securing permission to change its use.

"At its kindest, it it going to have a very detrimental impact on planning gains," says Mr Levy.